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Canadian Payroll Tax RatesPayroll Tax Deduction Topics - Part 2

by L. Kenway BComm CPB

In this chat, you'll find a handy reference of current payroll tax rates that would be useful to Canadian small business owners and bookkeepers working from home. Make Bookkeeping-Essentials YOUR practical solutions RESOURCE for basic accounting help.

What You'll Find In This Chat ...

Have a cup of tea while you browse through these payroll tax references.

Note 1 - On September 30, 2010, the Finance Minister announced that EI premiums for 2011 will rise by no more than 5 cents (.05%) per $100 of insurable earnings (instead of the expected 15 cents (.15%)) to 1.78% ... and 10 cents (.10%) for subsequent years.

However, on November 7, 2011, the Finance Minister announced EI premiums will only rise by 5 cents to 1.83% for 2012 due to the global economic slowdown.

Then on June 29, 2012 Bill C-38: the Jobs, Growth and Long-term Prosperity Act was given Royal Assent. One of the elements in this bill is to "ensure stable, predictable EI premium rates by limiting premium rate increases to 5 cents each year until the EI Operating Account is in balance, and then moving to a seven-year break-even rate".

Subsequently, the Harper government announced on September 9, 2013 they were freezing EI rates for three years at the 2013 rates.

On September 11, 2014 a Small Business Job Credit was introduced effectively reducing the 1.88% EI premium to 1.60% for 2015 and 2016. It applies to any business with EI premiums of $15,000 or less.

Beginning in 2017, the EI rate will be based on OSFI forecasted breakeven rate.

Note 2 - 2017 EI maximum insurable earnings were released on September 14 by ESDC. The breakeven rate is forecast at $1.63. Here are your 2017 amounts:

2016 EI maximum contribution is $955.04 excluding the Small Business Job Credit. The maximum amount in 2015 was $930.60.

Note 3 - Employers will continue to contribute 1.4 times the employee rates. Self-employed sole proprietors do NOT make EI contributions unless they have opted into the voluntary program. If they have joined, they pay the same rates as employees.

Who sets the EI rates?

The Canada Employment Insurance Finance Board (CEIFB) was established in June 2008 to improve the governance and management of the EI Account. It reports to the Minister of Human Resources and Social Development.

The Employment Insurance Commission will continue to be responsible "for supporting the EI appeal system, making regulations with the approval of the Governor in Council and reviewing and approving policies related to EI program administration and delivery."

In September 2013, the government suspended the CEIFB permanently. The Canada Employment Insurance Commission (the Commission) will be responsible for rate setting from 2017 forward.

EI For The Self-Employed

The Canada Revenue Agency (CRA) introduced new Employment Insurance (EI) measures for self-employed persons, that came into effect in January 2010. Claims** can be made after twelve months of participation in the program which meant people were first eligible in January 2011, if they were registered before April 1, 2010. This is a voluntary program.

"If you are a self-employed person, or if you are employed by a corporation and you control more than 40 percent of the voting shares of that corporation, you will be able to voluntarily enter into an agreement, through Service Canada, to be eligible for EI special benefits ... If you enter into such an agreement, you will be required to calculate and pay EI premiums on your tax returns for the applicable years."

Independent workers (taxi drivers, fishermen, hair dressers) are NOT eligible for this program as they are eligible for regular EI.

You can find more details on how to apply on the Service Canada website at A to Z Services Index> S> Self Employed EI benefits ... or you can visit my favorite tax website for a factual, easy to read break down. The special benefits are listed as well as qualifications to enter the program.

The cost will be the same premiums as salaried employees. You will NOT have to pay the employer portion which is 1.4 times the employee rate.

**One caveat - This program does not include regular EI benefits. Once you collect EI from this program, you will not be allowed to remove yourself from it (if you stay self-employed) ... so take time to make your decision before increasing your home business taxes.

Initial reference: Government of Canada news release November 3, 2009

Current Payroll Tax Rates-2017 CPP Rates(CPP rates are released in early November each year)

EE = employee's portion, ER = employer's portion

CPP Rates

2017

2016

2015

2014

2013

2012

2011

Basic Exemptionsee note 2

$3,500

$3,500

$3,500

$3,500

$3,500

$3,500

$3,500

Maximum Pensionable Earningssee note 3

$55,300

$54,900

$53,600

$52,500

$51,100

$50,100

$48,300

Maximum Contributionsee note 4

$2,564.10

$2,544.30

$2,479.95

$2,425.50

$2,356.20

$2,306.70

$2,217.60

Maximum Monthly Contributionsee note 4

$213.68

$212.03

$206.66

$202.13

$196.35

$192.22

$184.40

Self Employed Contribution Ratesee note 5

9.90%

9.90%

9.90%

9.90%

9.90%

9.90%

9.90%

Self Employed Maximum Contributionsee note 5

$5,188.20

$5,088.60

$4,959.90

$4,851.00

$4,712.40

$4,613.40

$4435.20

Self Employed Maximum MonthlyContribution see note 5

$432.35

$424.05

$413.33

$404.25

$392.70

$384.45

$396.60

Note 1 - CPP payroll tax rates for employers and employees have held steady at 4.95% since 2003 and will NOT be changing in 2017 as it was capped in 2003 (see resource note below).

Note 2 - first $3,500 of earnings continue to be exempt. However, thresholds and maximum contributions increase each year as average weekly salaries increase.

Note 5 - Employers will continue to contribute 1.0 times the employee rates. This means the maximum self-employed contribution is double ($2,564.10 x 2 = $5,128.20 or $427.35 per month). A good practice for the self-employed is to set aside monies monthly or make quarterly installments to pay your income tax and CPP that will become due in April each year.

Who invests the CPP Contributions?

GOODTOKNOW

How To Stop CPP Contributions

Employees between 65-70 of age who are already receiving CPP benefits must file an election (Form CPT30 Election to Stop Contributing to the Canada Pension Plan, or Revocation of a Prior Election) with CRA if they do NOT want to continue making contributions.

Employees between 65-70 years old who have filed elections can revoke them ... but the revocation doesn't come into effect until the following calendar year.

The Canada Pension Plan Investment Board (CPPIB) was created in December 1997 by an Act of Parliament to manage the CPP investment portfolio. This federal Crown corporation operates like a private sector investment management company with several legislative safeguards to protect it from political interference.

Their role is "to invest the CPP Fund to maximize returns without undue risk of loss".

CPPIB does not administer CPP benefits; this is done by The Canada Pension Plan. The Chief Actuary of Canada reviews the funding of the CPP program every three years. The next review is scheduled for November 2016 for the period 2013-2015.

source: http://www.cppib.ca/About_Us/

Is CPP Sustainable For Future Generations? Yes.

"Every three years the Chief Actuary issues a report that reviews the financial state of the Fund and measures its sustainability. The most recent report (2013) projected that CPP contributions will exceed annual benefits paid until 2023. The Chief Actuary's projection is based on the assumption that the CPP Fund will achieve a 4% real rate of return over the 75-year projection period of his report. ... Starting in 2023, the CPP is expected to begin using a small portion of CPPIB investment earnings to supplement the contributions that constitute the primary means of funding benefits."

How to Proof CPP and EI ... Payroll Tax Rates

In this day and age of computers, sometimes it is hard to know and understand how a number is calculated. Have you ever wanted to figure out your CPP and EI deductions by hand?

If you don't have a payroll program or service, and your payroll requirements are minimal, you can go to the CRA website and use their Payroll Deductions Online Calculator (PDOC). It will calculate the correct payroll tax rates for each employee.

Generally, here is how to calculate the employee and employer's portion for CPP and EI manually so you can spot check your overall payroll tax rates for CPP contributions and EI premiums. I like to do this when I first setup payroll to ensure I've done it correctly.

Remember, this is the calculation for a single payroll run. If you are proofing your full year, omit the "divide by the number of pay periods in the year" part of the calculation.

Calculation of payroll tax rates for CPP contributions - The gross payroll less the basic exemption ($3500 per employee divided by the number of pay periods in the year) times the CPP contribution rate of 4.95% (2016) equals the CPP premium (employee portion). The employer portion is equal to the employee contributions.

Calculation of payroll tax rates for EI premiums - The gross payroll times the EI premium rate of 1.88% (2016) equals the EI premium (employee portion). The employer portion is 1.4 times the employee premiums. Note there is no basic exemption for EI premiums.

PA - Pension adjustment ensures that all taxpayers at comparable income
levels will have access to comparable tax assistance, regardless of the
type of plan to which they belong. It is limited to 18% of earned income.

PSPA - Past service pension adjustment ensures benefit upgrades and past service purchases to defined benefit pension plans are charged against the 18% limit. As past service event is broadly defined as any transaction, event or circumstance that causes a member's post-1989 benefits to increase.

PAR - Pension adjustment reversal is used to restore an individual's RRSP room when a member terminates
their membership in a benefit provision of a registered pension plan or
deferred profit sharing plan (DPSP).

MP - Money purchase is an RPP. Unlike defined benefit plans, MPPs shift the risk of the retirement income level to the employee instead of the employer.

RPP - Retirement pension plan is an arrangement by an employer or a union to provide pensions to retired employees in the form of periodic payments.

RRSP - Registered retirement savings plan allows tax deferral on contributions until retirement income commences. Earnings in the plan remain tax-free and payments out of an RRSP are taxable on receipt.

DPSP - Deferred profit sharing plan is an arrangement under which an employer may share profits from their business with all or a designated group of employees to provide pensions.

YMPE - Year's maximum pensionable earnings is set by the government. It is the amount used in calculating annual CPP contributions.

TFSA - Tax free savings account

Source: CRA website

LET'S CHATABOUT...

What is PIER? ... And What To Do If You Get One

PIER stands for Pensionable and Insurable Earnings Review. It is a review CRA performs every year on T4 slips and T4 summaries submitted. They examine whether the correct payroll tax rates were used in your source deductions, and if remittances and reporting were adequate.

If you receive a PIER report (usually sometime during the summer), CRA has found a payroll tax rate deficiency in your records for the year under review. OOPS! The report comes with detailed instructions on how to proceed.

Here are two references on the CRA website that should help you deal with any CPP or EI under/over payments ... as you cannot recover shortfalls by adjusting the employee's income tax deductions.

If you are looking for more information on PIER reports, here is your reference:

A to Z index> Payroll> P> PIER-Employment Insurance (EI)

Statutory Holiday Payroll Tax Rates

To determine the pay rates for statutory holidays, refer to your provincial labour standards if you are under provincial regulations ... or federal labour standards for those under federal jurisdiction.

For BC, here is the link to the BC Ministry of Labour Statutory Holidays Fact Sheet ...

labour.gov.bc.ca/esb/facshts/statutory_holidays.htm

The Tax Detective blog on November 19, 2010 mentions that in B.C., "if a stat holiday falls on a regular day off, an eligible employee is to be paid an average day's pay, but the employer isn't required to give the employee another day off. Unless you have a very generous employer, don't expect to be paid for the statutory holidays and to get a day off in lieu, it will be one or the other, not both."

It should also be noted that Boxing Day is not a statutory holiday in B.C.

For Alberta ...

employment.alberta.ca/documents/WRR/WRR-ES-FI_esfs1.pdf

For Ontario ...

www.labour.gov.on.ca/english/es/pubs/guide/publicholidays.php

For federal standards and all other provinces / territories, try this link ...

www.canadabusiness.ca/eng/guide/1560/

LET'S CHATABOUT...

Who is excluded from paying CPP and EI premiums?

As a small owner manager, the employer portion of payroll tax rates burdens your payroll. The question you need to ask is ... when is it mandatory to pay CPP contributions and EI premiums to your employees?

CPP is a mandatory deduction for anyone employed between the ages of 18 and 70.

Everyone who is employed must contribute to EI. There are no age restrictions. Employees with earnings under $2,000 receive a 100% refund when they file their tax return. Those who earn over $2,000 may receive a partial refund calculated as follows: premiums paid - (earnings - $2,000) = refund.

The above are general rules. There are a lot of exceptions. So now let's answer that question by looking at when CPP and EI do not have to paid by the employer.

Some income is exempt from paying CPP contributions and EI premiums.

There used to be a nice short list of what was exempt. In 2012, CRA revised the site. While it is more comprehensive, it is harder to locate what is exempt now. Under the new site, you have two places to look:

How to Pay Employees with Cash

Employer Direct Deposit Rules

PaySavvy posted a great blog on the various direct deposit rules for employers across Canada. As you peruse the blog, you will notice that each province/territory is similar but different.

Generally, payroll direct deposits must be paid into the employee's account NOT third party accounts and side deals are illegal.

While it is important to be knowledgeable of and in compliance with the current payroll tax rates ... being aware of the Employment Standards Act in your province ... which includes the rules around payroll direct deposits ... is critical for employers.